MCViewPoint

By David Stockman

David Stockman’s Contra Corner

Even if you put a lot of stock in government manufactured GDP owing to unhinged spending and deficits, which we most definitely do not, it would be wise to be careful about what you are applauding. The allegedly resilient US economy, which is purportedly defying the Fed’s interest raising campaign, isn’t nearly what it’s cracked up to be.

There was a hint of this in Walmart’s Q4 earnings announcement yesterday in which it noted a “choiceful consumer” was spending less per trip and curtailing outlays for discretionary items in favor of low-cost necessities. And that admission was more than evident in the steady deflation of its USA comp store sales trend.

The figures in the chart are in nominal dollars, which declined by more than 50% between Q4 2023 (+8.3%) and Q4 2024 (+4.0%). Admittedly, inflation has been coming down too, as reflected in our trusty 16% trimmed mean CPI. The latter posted at +6.6% on a Y/Y basis in Q4 2023 and +3.8% in Q4 2024.

Still, the math says constant dollar sales have slipped even more than the reported nominal figures. The inflation-adjusted Y/Y gain in Q4 2023 was +1.7% compared to just +0.2% in the period just ended (Q4 2024).

Both figures are on the punk side, but there is “no way, no how” that the core main street consumer, who is a Walmart shopper by necessity, is in the pink of health as the stock peddlers of Wall Street and the “Joe Biden” puppeteers of the White House would have you believe.

Moreover, for want of doubt it should be noted that these marginal real sales gains were not due to the mighty Walmart loosing market share, either. The company reported that its surging eCommerce sales passed the $100 billion mark last year and that consequently Walmart “is gaining share in nearly every category”, according to CFO John Rainey.

So, the more appropriate question is not why the American consumer has been so resilient, but why the clearly fading consumer has remained in the game even this long.

Actually, however, there is no real mystery about the US economy’s defiance of the long-predicted recession. Nor is the purported stay of execution evidence that the geniuses at the Fed have orchestrated a “soft landing”.

What is happening is that some of the massive amounts of government manufactured GDP which flowed from $6.5 trillion of stimmy spending during the 12 months after March 2020 got temporarily placed in cold storage at household bank accounts. And since then it has been slowly dribbling into the spending stream, thereby bolstering demand stemming from current period production and earnings.

We think a good measure of this delayed “stimmy effect” is captured by the relationship between high-powered consumer spending accounts—checkable deposits and currency—and national income. That ratio had varied between 4.0% and 6.5% during the two decades prior to Q1 2020 but took off like the literal rocket ship shape depicted in the chart below.

As of Q3 2019, these spendable cash balances totaled $938 billion and represented about 4.3% of GDP. But by the peak of the stimmy tsunami in Q3 2022 the figures stood at $4.8 trillion and 18.5% of GDP. In the graph this implicit $4 trillion surge in household cash balances looks like a big middle finger, and well it might be.

Households have told the Fed in so many words that interest rate increases or no, they are sitting pretty on an aberrational $4 trillion cash cushion. They apparently intend, therefore to keep on spending the usual 96% of what they are currently earning, thereby causing the Fed’s vaunted monetary brake to essentially fail.

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